RBI clearly wants banks to perform different roles and cater to different sections of society; it indicated as much when it gave Bandhan, a microfinance institution based in West Bengal, a licence to set up a full-fledged bank. Now the central bank has put out draft guidelines for payments banks—essentially to provide payments, remittance services and deposit products—and small banks that will operate in specific geographies catering to the credit needs of micro and small businesses and small farmers in unbanked and under-banked areas. Neither of the models appears to be a particularly enticing business proposition. Payments banks can’t lend but must invest the deposits they collect in government securities with a maximum tenure of one year. To be profitable, therefore, these banks will need to keep the interest on the savings deposits at very low rates—probably below 4%—they are unlikely to get current accounts—since there will be the additional cost of maintaining the obligations of CRR and SLR.

Analysts estimate the maximum spreads, after accounting for transaction costs, could be 100-150 basis points in a best-case scenario. However, telecom companies, which have put in place strong technology platforms and distribution networks, have an advantage. A couple of the bigger Indian telcos are already running similar businesses in Africa. They are likely to be able to better leverage their existing structures and make a fair return before their economic interest gets diluted to 26%, which has to take place within 12 years.

As for small banks, there are the risks of lending to a confined area—namely a drought, a loan waiver—or that the loans aren’t diversified enough across industries. Moreover, that they will need to operate in contiguous districts could be restrictive and make it difficult to scale up the operations. While the R100 crore of minimum capital may not be a hurdle either for a payments bank or a small bank, entrepreneurs may prefer to set up NBFCs instead of small banks since that would be less onerous; while they would be allowed to raise deposits—it is not clear how much they will be able to mobilise—they would not need to meet statutory obligations and their operations can be more widespread. Lending in rural India is not easy as the condition of the Regional Rural Banks and some of the rural co-operatives shows.